CONSUMER AND

PRODUCER SURPLUS
 The concepts of consumer surplus and producer sur- plus are
extremely useful for analyzing a wide variety of economic issues.
They let us calculate how much benefit producers and consumers
receive from the existence of a market. They also allow us to
calculate how the wel- fare of consumers and pro- ducers is affected
by changes in market prices. Such calculations play a crucial role in

CONSUMER evaluating many economic policies.

What information do we need to calculate con- sumer and producer

AND sur- plus? Surprisingly, all we need are the demand and supply
curves for a good. That is, the supply and demand model isn't just a
model of how a competitive market works-it's also a model of how

PRODUCER much consumers and producers gain from partici- pating in that
market. So our first step will be to learn how consumer and producer
surplus can be derived from the demand and supply curves. We will

SURPLUS then see how these concepts can be applied to actual economic
issues.
 The concepts of consumer surplus and producer sur- plus are
extremely useful for analyzing a wide variety of economic issues.
They let us calculate how much benefit producers and consumers
receive from the existence of a market. They also allow us to
calculate how the wel- fare of consumers and pro- ducers is affected
by changes in market prices. Such calculations play a crucial role in

CONSUMER evaluating many economic policies.

What information do we need to calculate con- sumer and producer

AND sur- plus? Surprisingly, all we need are the demand and supply
curves for a good. That is, the supply and demand model isn't just a
model of how a competitive market works-it's also a model of how

PRODUCER much consumers and producers gain from partici- pating in that
market. So our first step will be to learn how consumer and producer
surplus can be derived from the demand and supply curves. We will

SURPLUS then see how these concepts can be applied to actual economic
issues.
WILLINGNESS TO Consumer surplus is the difference between willingness to pay for a

PAY AND good and the price that consumers actually pay for it. Each price
along a demand curve also represents a consumer's marginal benefit

DEMAND CURVE of each unit of consumption. The difference between a consumer's

marginal benefit for a unit of consumption, and what they actually

AND pay, represents how much benefit a consumer get's from the price
they are paying. Consumer SurplusThe amount consumers are

WILLINGNESS TO willing to pay for a particular quantity of a good represents the

marginal benefit of consumers at each quantity. Marginal benefit is

PAY AND the amount of additional happiness consumers get from a good for
the last unit they consume.

CONSUMER
SURPLUS
 A supply curve can be defined as the graphical representation
of a supply function that gives a relationship between the
price of goods or services and the quantities supplied.

THE PRODUCER Producer surplus is the difference between the amount a seller

SURPLUS AND THE

receives for a good or service and the production cost of that
good or service. It is calculated by the following formula:

SUPPLY CURVE PS= Amount received - seller cost

 From the Graphical representation, we can calculate the
producer surplus by taking the area below the price and above
the supply curve, and it can be shown in the following
diagram:

THE PRODUCER
SURPLUS AND THE
SUPPLY CURVE

From the diagram, we can deduce that the producer surplus is

the area of △△ PES'.
 Gain from trade is the net economic benefits that a person or nation gains
from engaging in trade with another,

trading with others allows us to have access to a more diverse array of goods
and services and to specialize in the production of goods that we excel at.

2 TYPES OF GAINS FROM TRADE

-Static
-Static gains from trade are those that increase the social welfare of the people

GAINS FROM living in the nations.

-Dynamic Dynamic gains from trade are those that help the nation's economy
grow and develop faster than if it had not engaged in trade.

TRADE TOTAL SURPLUS

- is the total net gain to consumers and producers from trading in the market. -
is the sum of the producer and the consumer surplus
.
 EFFICIENT MARKET PERFORMS FOUR FUNCTIONS:

1. It allocates consumption of the good to the potential buyers who most value
it, as indicated by the fact that they have the highest willingness to pay.

2. It allocates sales to the potential sellers who most value the right to sell the
good, as indicated by the fact that they have the lowest cost 3. It ensures that
every consumer who makes a purchase values the good more than every seller
who makes a sale, so that all transactions are mutually beneficial 4. It ensures
that every potential buyer who doesn't make a purchase values the good less

GAINS FROM than everyy potential seller who doesn't make a sale, so that no mutually
beneficial transactions are
missed

TRADE Policies that promote equity often come at the cost of decreased efficiency,
and policies that promote efficiency often result in decreased equity. So it's
important to realize that a society's choice to sacrifice some efficiency for the
sake of equity, however it defines equity, is a valid one. And it's important to
understand that fair-ness, unlike efficiency, can be very hard to define Fairness
is a concept about which well-intentioned people often disagree.
.
 A market economy is an economic system in which economic decisions and
the pricing of goods and services are guided by the interactions of a country's
individual citizens and businesses. There may be some government
intervention or central planning, but usually this term refers to an economy
that is more market oriented in general.

MARKET
The theoretical basis for market economies was developed by classical
economists, such as Adam Smith, David Ricardo, and Jean-Baptiste Say.
These classically liberal free market advocates believed that the “invisible

ECONOMY
hand” of the profit motive and market incentives generally guided economic
decisions down more productive and efficient paths than government planning
of the economy. They believed that government intervention often tended to
lead to economic inefficiencies that actually made people worse off.